Spousal Buyout Guidelines

[LdiJ]

Trace the steps the IRS does with the OPs facts. See, http://www.irs.gov/pub/irs-wd/0246029.pdf.

LAW AND ANALYSIS
Section 71(a) of the Code includes amounts received as alimony or separate
maintenance payments in gross income. Under § 71(b), the term “alimony or separate
maintenance payments” means any payment in cash if (A) such payment is received by
(or on behalf of) a spouse under a divorce or separation instrument, (B) the divorce or
separation instrument does not designate such payment as a payment which is not
includible in gross income under this section and not allowable as a deduction under §
215, (C) in the case of an individual legally separated from his spouse under a decree
of divorce or of separate maintenance, the payee spouse and the payor spouse are not
members of the same household at the time such payment is made, and (D) there is no
liability to make any such payment for any period after the death of the payee spouse
and there is no liability to make any payment (in cash or property) as a substitute for
such payments after the death of the payee spouse.
Section 71(b)(2) defines “divorce or separation instrument” as (A) a decree of divorce or separate maintenance or a written instrument incident to such a decree, (B) a
written separation agreement, or (C) a decree (not described in subparagraph (A))
requiring a spouse to make payments for the support or maintenance of the other
spouse.
Section 215(a) provides that an individual shall be allowed as a deduction an
amount equal to the alimony or separate maintenance payments paid during such
individual’s taxable year. Under § 215(b), the term “alimony or separate maintenance
payment” means any alimony or separate maintenance payment (as defined in § 71(b))
which is includible in the gross income of the recipient under § 71.
If a payment satisfies all of the factors set forth in § 71(b), then it is alimony; if it
fails to satisfy any one of the above factors, it is not alimony. Jaffe v. Commissioner,
T.C. Memo. 1999-196. The facts and representations set forth in your submission
indicate that the requirements in subparagraphs (A), (B), (C), and (D) of § 71(b)(1) are
satisfied with respect to the Payment to be made to Former Spouse.
In the instant case, the Court Order is a divorce or separation instrument under
§ 71(b)(2) as it requires Taxpayer to make payments for the support and maintenance
of Former Spouse under Section 3 of the Court Order. Former Spouse will receive the
Payment in cash pursuant to the Court Order. The Court Order does not exclude the
Payment from Former Spouse’s gross income or preclude Taxpayer from deducting
Payment under § 215. Taxpayer and Former Spouse have not shared the same
household since the divorce. Taxpayer is not required to make any payments after
Former Spouse’s death pursuant to Paragraph 16, Sentence 1 of the Settlement
Agreement, which is incorporated within the Court Order. The Payment is not a child
support payment because it is not contingent on events associated with any children in
the Court Order. Accordingly, the Payment to be made to Former Spouse is alimony or
separate maintenance within the meaning of § 71 of the Code, and thus, deductible by
Taxpayer under § 215 when Payment is made.

Is that going to clarify the debate or prolong it...LOL.

To quote one of my professors...."the tax code is as clear as mud".

 

[tranquility]

It may not end anything, but it should reel in some of the further out theories.

 

[Bali Hai]

Bali, do you have any idea how many people try to do something like that in order to disguise a property settlement as alimony? Yes, it has to clearly describe that, but the property settlement also has to make sense in order for the IRS to buy it.

Plus, since there are no carryforwards for alimony, if the lump sum alimony was higher than the payor's taxable income they wouldn't get the full deduction...even if the IRS agreed that it was alimony.

Understood LdiJ. I have to ask this question with respect to you and your profession.... Who in their right mind would agree to receive a taxable lump sum alimony payment disguised as a property settlement that they didn't have to pay income tax on?